Turkcell Iletisim Hizmetleri A.S. (TCELL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the Turkcell's conference call and live webcast to present and discuss the Turkcell First Quarter 2023 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Ali Yagci, Investor Relations and Corporate Finance Director. Mr. Yagci, you may now proceed.

Thank you, Gaily. Hello, everyone. Welcome to Turkcell's First Quarter 2023 Results Call. Today, our CEO, Mr. Murat Erkan; and acting CFO, Mr. Kamil Kalyon, will be delivering a brief presentation on operational and financial results. And afterwards, we will be doing Q&A. Before we start, I would like to kindly remind you to read our safe harbor statement, which is placed at the end of the presentation. Now I'm handing over to Mr. Erkan.

Thank you, Ali Yagci. Good morning, and good afternoon, everyone. Thank you for joining us. We have been hearing the event of the recent earthquake, which happened to be one of the worst disaster of our history. We have taken certain actions to make sure people do seamlessly communicate in the region. Turkcell also remains committed to support the local community through projects that aim to increase employment and we will also make our digital channel available for local producers and suppliers. Moving on to Q1 highlights. Our revenue growth continued to accelerate from 37% of Q1 2022 and reached to a remarkable 61.5%. Thanks to the expanding subscriber base and increasing ARPU despite the negative impact of the earthquake during the half of the quarters. Excluding the earthquake impact, the growth would have been around 65%. The strategic focus area, mainly digital business services and techfin segments also supported topline growth with a strong performance. We are happy to see our mobile ARPU growth, which achieved 68%, exceeding the headline inflation as we reap the benefits of sequential price increase, we began at the end of 2021. On the profitability side, our EBITDA reached TRY 6.8 billion with a 57% increase. And despite the ongoing inflationary pressure, we achieved a margin of just over 39% in line with our expectation, which accounts for the impact of the disaster on our OpEx. Excluding the earthquake impact, the margin would have been 41%. Last but not least, we recorded a solid net profit of TRY 2.8 million, mainly on the back of the strong operational performance as well as lower FX losses. Next slide. Let's take a closer look at our mobile operational performance. As a part of our strategy, we have been focused on attracting premium subscriber which led to a net additional 342,000 postpaid subscribers in Q1, bringing postpaid share to 69%. Prepaid net addition were impacted by lower new subscriber demand in the earthquake region and from the competitive offers as well as higher involuntary churn due to significant tourist arrival in Q3 last year. While we observed the continuing impact of year-end campaigns in the beginning of the year, the market rationalized after the earthquake and overall, the MNP market contracted in Q1. To support the victims of the earthquake, all operators frozen price actions. We also passed telesales to respect our national [ agreement ]. We resumed both mobile price adjustments and telesales by April. Despite the impact of the earthquake, blended mobile ARPU growth accelerated to 68% year-on-year. Our pacing to 54% average annual inflation within the quarter. Without the earthquake impact, we shall note that the ARPU growth would have been around 75%. Our mobile churn rate of 1.7% is reasonably below 2% despite a slight increase year-on-year due to the higher prepaid churn. The monthly data usage of 4.5G users have reached 17.4 gigabytes, driven by 88% smartphone penetration, up 1.5 points year-on-year. Next slide, please. As expected, the earthquake also had a negative impact on our fixed broadband business. However, we saw a significant demand for our services in March due to location in the impacted area. Our focus on fiber subscriber continued, resulting in a net additional 38,000 fiber subscribers in Q1. Our IPTV platform also saw a net additional 28,000 subscribers in the same period. After the long-rated notable price adjustment in Q4 last year, and due to the earthquake, there were almost no significant price adjustment in the fixed broadband market. However, we introduced uncommitted offering in general which were appreciated by customers. We also saw continued traction in high-speed packages with 44% of new subscribers, opting for 100 megabits or higher packages. Our annual residential fiber ARPU growth in Q1 slightly decreased to 31% compared to previous quarter, mainly due to the action we have taken for earthquake victims. Excluding this impact, the ARPU growth would have been 36%. The slight increase in fixed churn is also triggered by the distraction in the earthquake regions. As we announced previously, our target is to reach 300,000 home passed this year, and we have already exceeded half of that in Q1. We then aim to increase return on investment. We will focus on increasing our take-up rate by addressing potential subscribers in the relevant home-passed areas. Next slide. And now in the next 2 slides, I will be providing an update on our strategic focus areas. Let's start with the digital services and solutions. In Q1, stand-alone revenue of digital services and solutions grew by 65% year-on-year. This was enabled by digital OTT service revenue rising 72% year-on-year. Our flagship digital OTT services, mainly cloud storage, TV and music streaming platforms were the main pillar software growth on the back of price adjustment and paid user expansion collectively stand-alone paid user number grew 24% year-on-year, reaching 5.2 million despite this decline outreach due to suspension of marketing campaigns after the earthquake. Our second focus area, digital business services, addressing digital transformational enterprises, posted a strong growth of 104% year-on-year. The main drivers of growth are system integration projects, data center and cloud business. Exceeding 11% of total DBS revenue, data center and cloud business -- cloud services more than double the top line with strong demand from both local and international clients. In this quarter, we gained more than 1,100 new contracts. The backlog from system integration projects reached TRY 2.5 billion, which will contribute to the top line over the upcoming quarters. Next slide, please. Our third focus area is Techfin. In Q1, Paycell, Turkey's leading payment platform, increased revenue by 79% year-on-year. Almost tripling transaction volume was enabled, thanks to an ongoing shift into digital payments. Pay Later, which is the leading product of the Paycell, maintained its strong revenue trend and double its transaction volume, mainly supported by the transactional payment in Apple and on restores. POS solution transaction in sized rose more than 4x. Given the increased penetration in the physical POS devices in the market and our exclusive role in the joint electric vehicle projects to TOGG's pre-sales project. On the consumer financing side, Financell's revenue grew by 65% on rising interest rates and expanding loan portfolio. Financell's loan portfolio expand 7% year-on-year, mainly reflecting the increased device prices in the market as well as corporate segment initiatives. Due to the diversification in the portfolio as well as action taken after the earthquake, cost of risk increased to 2.7%. Next slide, please. Now let's look at the performance of our international subsidiaries. Turkcell International revenue grew by 31% year-on-year in Q1. Excluding the currency impact, the organic growth was 20%. Lifestyle revenue rose 16% year-on-year in its local currency. EBITDA margin expanded by 4 percentage points compared to the last year, reaching 60%. Thanks to higher revenue growth and lower international interconnection expenses. BeST revenue rose 15% year-on-year in its local currency. EBITDA margin expanded by a remarkable 15 percentage point compared to last year. Thanks to the recently revised MTR rate, which led to lower interconnection expenses. Next slide. I would like to say a few words about TOGG, our e-mobility initiative. Our investment in Turkey's electrical vehicle initiative is a solid step towards realizing opportunity in the e-mobility ecosystem. In a promise to deliver Turkey's first smart mobility devices, as you may recall, the omni technology compass had become ready for mass production in October last year. In March, TOGG began prices of its first smart mobility devices and received a strong demand of 9x. Electric vehicle deliveries started in April. As Turkey's leading payment platform, Paycell provided the payment infrastructure for the process through TOGG's owned app. Paycell managed to process around TRY 11 billion transaction smoothly and it's very first company in the world to achieve such a large transaction volume through a rolled up in a short time. In the meantime, TOGG has led the foundational [ positive ] development and production factor adjacent to its technology compass, together with battery giant Farasis energy. The facility is planned to be completed by 2024. Now I would like to leave the floor to our acting CFO, Mr. Kamil Kalyon.

Thank you, Murat. Now let's take a closer look into the financials. Group revenues grew by 62% year-on-year, corresponding to an incremental rise of TRY 6.6 billion. This quarter was another period where we saw the results of our dedicated price adjustments resulting in robust ARPU growth. Turkcell Turkey revenues rose 70% in this quarter, thanks to an expanding subscriber base and an ARPU growth that exceeds inflation. Our digital business services was another revenue driver with its settling performance. The revenue contribution of International segment was limited to TRY 442 million in this quarter, reflecting the easing inflation in our international markets as well as the slowdown in currency depreciation. Segment Sigma added TRY 253 million to the top line on the back of patience tripling, transactional volume and Financell's higher loan portfolio and average interest rates. Improvement of the other segment's contribution on a yearly basis is mainly thanks to a rise in sales from digital channels and higher equipment revenues. Next slide, please. Now some highlights on EBITDA development. Strong revenue growth has been the key driver of the 57% rise in EBITDA. In this quarter, EBITDA margin contracted by 1.1% year-on-year, declining the interconnection expenses as a percentage of revenues partially compensated the rise in personnel expenses. Please recall that we had made a secondary rise to wait in July last year on top of the January rise following the minimum page increase. Energy expenses had a limited impact on the EBITDA margin as last year's energy price hikes were exceptionally high. Last, I would like to mention about Turkcell International's profitability. In this quarter, EBITDA margin of the segment improved by 3.8% year-on-year. Lifecell's improving margin performance in Ukraine was joined by BeST in Belarus, thanks to the recently announced MTR change in favor of us. Next slide, please. Let's take a closer look at our CapEx management. As we begin the year, we are implementing a disciplined CapEx plan, which brings our last 12-month CapEx intensity ratio to 20.6%, in line with our guidance. Looking at the CapEx breakdown, mobile and fixed investments each account for 1/3 of the total CapEx. On the mobile CapEx side, our nondiscretionary approach is still intact as evidenced by a single-digit mobile CapEx intensity. Of note, we had to make around TRY 350 million one-off CapEx due to the earthquake. On the fixed side, having realized 1.5 million fiber home passes in past 2 years, we have decided to slow down the given compelling cost environment. Therefore, this year, we will focus on monetizing these recent home passes. This quarter, we added 160,000 new home passes to our portfolio. We are proceeding with expanding our white space capacity in our data centers. Thanks to modular structure of our existing data centers, we are just adding new modules to meet increasing demand. Next slide, please. At the end of Q1, our gross debt position increased by 4.62 TRY 59 million due to new borrowings and currency depreciation impact of TRY 1.4 billion. Our cash position increased by TRY 1.4 billion to just over TRY 27 billion in Q1. FX movements had TRY 0.5 million positive impact in the cash position. To note, TRY 1.4 billion wireless usage tax payment in Q1 negatively affected our cash position. As of first quarter of the year, group net debt was around TRY 23 billion with a 0.9x net leverage. Excluding the Techfin business, this was at 0.8x, in line with the previous quarter. We are far below from our long-term threshold of 1.5x net debt to EBITDA. Of note, 10% depreciation in our currency leads to a 0.1x increase in our net leverage. The majority of our cash continues to remain in hard currencies. Excluding FX swaps, 57% of our cash is in U.S. dollar and 15% in euros. This cash is sufficient to cover our debt service until 2025. The FX debt service is around USD 280 million this year, which we believe is reasonably manageable given our strong cash position and committed long-term credit lines. Next slide, please. Lastly, I will go into the management of foreign currency risk in Q1. We have continued to keep majority of our cash in FX and also utilize hedging instruments as part of our prudent financial risk management approach. Looking at the FX position composition, we had USD 1.9 billion equivalent of FX debt on our balance sheet. On the asset side, we had USD 1.4 million equivalent FX cash and a USD 600 million derivative portfolio mainly comprised of proxy hit, name with futures and forwards. Overall, we ended up with a short FX position of just USD 21 million, which is within our neutral FX position definition of plus and minus USD 200 million. We may, however, see a higher short FX position from time to time during the rest of the year due to evidence of liquidity as higher costs for hedging as well as a result of 2G license fee of around EUR 140 million. This concludes our presentation, and we can now open the line for questions. Thank you.

[Operator Instructions] The first question is from the line of Kennedy Good Jonathan with JPMorgan.

Just a quick one on the potential price increases for the rest of the year. When should we expect further price increases on the mobile side? And given now that your mobile ARPU is growing well ahead of inflation, how should we expect price increases to evolve? And then secondly, there was a significant cash outflow in terms of working capital, I think, driven by an increase in your trade receivable balance, can you give us a sense of what drove that and whether that will reverse in the quarters to come?

First of all, thank you very much, Jonathan. Let me take the first question regarding price increase. As you know, we are the leader operator in mobile and our priority in a high inflation environment is to adjust our price in a timely manner. So due to the earthquake in the first quarter, we had temporarily stopped price increase in February and March, but continue with the price adjustment in April. We aim to maintain our price-focused strategy throughout the year. So far, we increased our price almost every quarter and our aim is to keep this behavior. And we have successfully implemented this strategy last 2 years. And this -- the accelerating ARPU growth and revenue growth clearly showed this attitude. So despite the negative impact of earthquake on ARPU, mobile ARPU increased 68% annually. So we beat the inflation, which was 54.3%. So if we get rid of the earthquake impact, the ARPU growth would be around 75%. So the strategy clearly works well. So let me give the word to Kamil regarding the outlook of cash outflow.

Thank you, Murat Erkan. As you know, every year, we paid the frequency usage fee in the first quarter, and we will collect it from subscribers throughout the year. We paid TRY 1.4 billion for this in Q1 at the end of February. The first reason was this. The second one, there were some important factors that adversely affected our cash generation to our working capital. One of these bond teams we made to our employees for the previous years. Expansion of Financell's loan portfolio is the second season. And the third one, receivables from our growing EBS business, which are relatively longer term, is the third reason. And I may add to this, due to earthquake, we've stopped collecting some payments from our subscribers for 1.5 months period. Therefore, it also increased our trade receivables for a limited time.

The next question is from the line of [indiscernible] with Schroders.

Hello, can you hear me? You mentioned the position of your credit lines. Can you remind them where they ended the quarter and where they are right now? And also, can you elaborate a little bit on your newly contracted liquidity?

We have some committed. We have a significant amount of committed lines in EKN and CDB side, we do not have any problem about the position of our credit lines. Also, we are trying to add new credit lines to our portfolio this year, around EUR 220 million CDB will end in March 2024. And EKN credit line was around $30 million.

[Operator Instructions] Our next question is from the line of [indiscernible] Securities.